The SEC Stays Its Own Climate Rule—What’s Next?
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The SEC Stays Its Own Climate Rule—What’s Next?

Brownstein Client Alert, April 9, 2024

On March 6, 2024, the U.S. Securities and Exchange Commission (SEC) finalized a historic set of climate disclosure rules, which stand to be the most significant disclosure regime change since the Sarbanes-Oxley Act. The rule quickly faced litigation, including a series of cases filed across the country that were consolidated by the Judicial Panel on Multidistrict Litigation (“MDL”) into a single proceeding before the U.S. Court of Appeals for the 8th Circuit.

Before the case was consolidated, the petitioners successfully obtained an administrative stay in the U.S. Court of Appeals for the 5th Circuit pending review. Notably, an administrative stay is a judicially supplied stay and can be lifted at any time at the court’s discretion. Once the case was transferred to the 8th Circuit, the stay was lifted, requiring the petitioners to move for reimposition of the stay. The SEC originally opposed the stay and further objected to additional briefing before the 8th Circuit.

Thus, it was somewhat surprising for the SEC to move to stay its own rule on April 4, 2024. The SEC’s order does not in any way concede the legality of the rule, stating instead, “A Commission stay will facilitate the orderly judicial resolution of those [legal] challenges and allow the court of appeals to focus on deciding the merits.” The typical period of time required for an appellate court to rule on a petition for review is 12–16 months. Recent examples include the review of the SEC’s proxy rules and a transaction fee pilot for NMS stocks, which respectively took one year and one-half year. If the appellate court’s ruling is appealed to the U.S. Supreme Court, we could expect a decision in June 2026.

SEC Chair Gary Gensler was notably silent on the rule in his remarks at a well-attended securities conference in Washington, D.C., called “SEC Speaks.” His Republican counterparts were less demur, with Commissioner Mark T. Uyeda describing the rule as having a: “fundamental flaw … that mandates disclosures not financially material to investors.” Commissioner Uyeda proceeded to describe the commission as lacking authority to enact the disclosure regime: “It is the Commission that determined to delve into matters beyond its jurisdiction and expertise. In my view, this action deviates from the Commission’s mission and contravenes established law.” Although the rule is subject to scrutiny via the Congressional Review Act in the current session of Congress, any change in the political climate, particularly control of the White House, will impact the political landscape at the SEC going forward.

Given this dynamic, should public companies begin working toward compliance with the rule? The practical, short-term solution is to view these latest developments as a “pause” in the implementation process. Given the current status of the litigation proceeding, the SEC’s implementation timeline is likely to be delayed. The agency suffered similar setbacks with its heavily contested conflict minerals rules, among other controversial rulemakings finalized under Gensler’s tenure. The current timetable for the climate disclosure rule requires Large Accelerated Filers to make their first disclosures for fiscal year 2025, so effectively those disclosures would be due in the first quarter of 2026. We can expect this will be pushed out.

And yet, the SEC’s rules cannot be viewed in a vacuum. As it stands today, California is continuing to move forward with implementing its own robust climate disclosure rules, which have a low threshold for applicability (“doing business in California” is already defined in existing law as “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit”) and will wrap in many registrants. Further, the European Union (EU) is moving forward with its aggressive disclosure regime, which in turn will require even private companies to assist if they are part of an EU-based company’s Scope 3 emissions stream.

Furthermore, registrants are likely to find that many of their industry peers and competitors are moving forward with aggressive, voluntary climate disclosures, whether in the form of environmental, social and governance (“ESG”) targets, climate transition plans, sustainability plans or other frameworks. Registrants may need to pace their disclosure regimes off of their peers. Moreover, asset managers will continue to look at ESG and other environmental disclosures to customize trading products.

The SEC’s stay may have a limited impact due to its temporary nature. The commission’s staff is already fully empowered to ping companies for failing to disclose material information. And if anything, the climate rule serves as an indication for the staff’s focus on registrants’ climate disclosures and their view that such disclosures are material. Registrants who put “pencils down” on implementing the rule will be caught flat-footed. As such, our advice is for registrants to continue to move forward with the following tasks:

  • Registrants should work with management and the board of directors to harmonize key environmental goals and start to think through the impact of disclosing these goals—whether through a formal filing with the SEC or furnishing the report to investors. The SEC has already indicated that once a company discloses an environmental goal or target, these disclosures should be wrapped into the company’s quarterly and annual filings and be consistently measured and described.
  • Registrants should develop robust internal controls for climate disclosures. Those with internal and outside audit functions appreciate that an internal control regime is a complex infrastructure that requires months of implementation, testing, recalibrating and acculturation, and cannot be airdropped in.
  • Relatedly, registrants should begin to identify both within the organization and outside, through service providers, who will manage their internal controls reporting structures.
  • Audit committees should start to develop oversight controls and processes for reviewing key environmental goals and disclosures. Just like financial oversight, audit committees’ charters should integrate the cadence for climate oversight, the stakeholders, and consider whether the company’s outside auditor or third-party service provider is appropriately reviewing and eventually attesting to the accuracy of the company’s climate disclosures.
  • Registrants should continue to monitor the impact of state and international climate disclosure regimes to ensure that it is not behind in implementing the processes required to meet these new disclosure objectives.

In many ways, the SEC’s stay is just a pause and not a stop on the climate disclosure expectations that companies will face in the future. The extra time should not be wasted.

This document is intended to provide you with general information regarding the SEC's proposed climate disclosure rule and related litigation. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions. The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and insights are not automatically updated, continued accuracy cannot be guaranteed.

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